How to Navigate Buying a Home Post Pandemic

If you’ve been following the housing market, you’ve heard about record-high housing prices, inventory shortages, bidding wars, and most recently an increase in mortgage rates. Many first-time home buyers have been priced out of the housing market and to add insult to injury rent prices have also skyrocketed all over the country. As a Realtor, I can tell you it’s not a great time for buyers to purchase. Unless you have a couple of years to ride out this market, in today’s market a buyer will likely end up paying more money either in increasing home prices and/or higher interest rates over the next 12 months. The biggest question I’m asked is “Are we in a bubble, or will there be a housing crash? The short answer is Yes: I do believe we will experience a decline in the housing market but unfortunately, it won’t be immediate. No one can perfectly time a housing market crash so the best I can tell you is if you have the means to buy now and need to purchase now then do so. On the other hand, if you’re a future buyer that can wait a bit and I’m talking 2 years+, then you will likely see a price correction on home prices.

Currently, home prices are overinflated by up to 60% in some markets. In a stable market, homes appreciate on average 3-5% per year depending on the market area. However, since the COVID-19 Pandemic hit in 2020 home prices have surged on average 18-23% year after year, multiply these jumps times three years and you’ve got severely overpriced homes that truly are not worth the prices we are seeing. How did prices get here you might ask? It’s very simple supply vs demand. During the pandemic, remote workers relocated and flocked to suburbia and began looking for homes to purchase, and at the same time, Wall Street Corporations began snatching up the available inventory in major metro areas to add to their rental portfolio causing an extreme shortage of inventory. Fewer homes for sale + an influx in buyers= increased home prices.

Now it’s not all bad news, as Sellers have made record profits in some cases doubling or tripling their initial investment which is typically unheard of in such a short amount of time. Buyers on the other hand have paid out the wazoo to purchase a home in the post-pandemic real estate current market. To give a personal example: My spouse and I looked at a new construction community in the Tampa metro and were told by the builder that they weren’t taking new reservations due to supply chain and labor shortage issues, but were assured the builder would be releasing new lots in the coming months. This was Jan 2021 and the community was a middle-class single family community starting in the low 400,000s. Fast forward to April 2021 when new lots were released, those same floorplans had gone from 420k to 508,000+ and this was the base price point excluding the lot or any options/upgrades. Now unless you are sitting on a pile of cash the average middle classed American cannot afford to increase their mortgage budget by 90,000-100,000.

So how do you compete in today’s market? I’m going to give you the info you need to increase your chances of winning a bid should you decide to move forward and purchase a home in the coming homes.

1. Hire a Realtor:

Look for an agent that services the market you are looking to purchase in. I recommend interviewing several agents and asking them for referrals from recent clients they’ve closed deals on. There is no shortage of real estate agents or Realtors out there, however, they are not all created equally. The difference between the two is that a Realtor is a member of the National Association of Realtors and has to honor the Realtors’ code of ethics. A real estate agent has undergone all of the same training and obtained a license through the Real estate commission within their state but likely opted not to pay the additional fees to join NAR. Most brokerage firms (i.e. Keller Williams, Coldwell Banker, Remax. Berkshire Hathaway, etc) require their agents to join a local Board of Realtors as well as the National Board of Realtors.

2. Get a mortgage Pre-Approval:

You can use a mortgage lender or a bank but keep in mind a mortgage lender will have more loan products available than a traditional bank and can work with various credit types. Ask your Realtor for recommendations for a mortgage lender. It’s important to shop around and get quotes from at least 2 lenders to compare loan products as the closing costs/fees can vary drastically from one company to the next.

Now one thing that is important to note is that a mortgage pre-approval is easy to obtain it’s essentially a loan application and a credit check. If a lender deems you creditworthy based on your credit score and income reported, they will give you a figure that you are approved for. In today’s market, you will need to go a step further before putting in an offer. Sellers are now requesting Desktop approval from the mortgage underwriting department. This means once you obtain the pre-approval letter you will need to move forward in the process and submit your last 2 months’ bank statements, tax returns for the past 2 years, and supply pay stubs covering at least 30 days likely the past 60 days. At this point, the lender will do a deeper dive to determine if you can actually afford a home in the price range you were pre-approved for. If all goes well and you get the green light from a lender, you can now begin shopping for homes.

3. Find the home you like and put an offer in.

The biggest things to note are that you will need to move very quickly if you see a house you like. You will also need to have your earnest money readily available and be ready to access these funds once you get an offer accepted. Earnest money is essentially a good faith deposit that you will put down with your executed contract and this money will count as part of your down payment. You should plan to be competing against multiple buyers and will need to make your offer appealing to have a shot.

4. How do I make my offer stand out?

Your Realtor will assist with this part but essentially you should plan to make a full-priced offer unless the home has been on the market for over 45 days and is vacant. You will likely be one of several offers and the best offer wins. The offer that is the highest and that has the least number of contingencies has the best shot of winning. Many bidders are going above and beyond the asking price. If you find yourself in a bidding war set a maximum number that you are willing to pay and do not exceed that. I’d recommend not going over 5% of the list price. Cash buyers are typically given top priority so if you find yourself competing with a cash buyer, those offers are tougher to beat though not impossible. You can personalize your offer by including a personalized letter telling the seller about yourself and what the home would mean to you and your family.

5. What contingencies are okay and what is a contingency?

A real estate contingency is a clause within the purchase agreement that specifies a requirement to be met before the contract can become legally binding. Examples include an appraisal contingency, financing contingency, inspection contingency, and sale of prior home contingency. This is a hot-button topic currently as some agents are telling clients to remove the inspection contingency as well as the appraisal contingency. I will only say do this at your own risk. I Do Not recommend any buyer to purchase a home without an inspection if you plan to live on the property. If you are an investor and have cash on hand to make repairs or tackle unseen problems that may arise, then you can get away with it. If you are financing the home and plan to live in the home, then purchasing without an inspection can cost you thousands of dollars in repairs if you find out after closing that the home needs major repairs. The other contingency being dropped is the appraisal contingency. This also can be problematic as homes are already over-valued. Essentially when you finance a home the bank/lender will only lend you up to the amount of the appraised value. For example, if you sign a sales contract to purchase a single-family home for 500,000 and the home appraises for 450,000, the bank will only finance up to 450,000. (Note you would need to factor in your down payment amount i.e. 10,000 down would mean financing 440,000).

So what happens next? If you have an appraisal contingency in the contract, you can ask the Seller to reduce the purchase price to 450k so the deal can move forward. You might also request a second appraisal to see if the second one comes in higher but this is not guaranteed. Ultimately if the Seller refuses to lower the price, you can terminate the contract and get your earnest money deposit refunded. However, if you removed the appraisal contingency, you are still contractually obligated to purchase the home despite the 50,000 deficit. At this point, you will need to come up with an additional 50,000 to cover the difference. Unfortunately, if you are unable to do and have to break the contract, you will likely lose your earnest money.

By now you are probably stressed out at the thought of having to deal with purchasing in this market. Buying a home is one of the most important purchases most people make in their lifetime. You absolutely can get through the process and close on your dream home, but you will need to be patient and realistic. Select a team of qualified professionals your realtor and your loan officer will work together to get you to the finish line. Be aware that you might get outbid on several properties before you are successful in getting an offer accepted and that’s okay. Unless you are wealthy you need to stay within your budget.

You also want to make sure the home has what you need in terms of location, square footage, features, parking etc. I’d recommend you write down a list of must-have features vs things you want. Decide what you can compromise on and what things are deal breakers. Also do your own research you need to find out what the property taxes are for the properties you are interested in, as well as how much it costs to insure the property. Florida residents have to worry about flood insurance if they’re in a flood zone and this is an additional cost on top of standard homeowners insurance. California residents may pay triple the costs of other markets if they are looking in an area prone to wildfires. If you have children research the local schools to see if they are up to par. If you have medical conditions determine how far away is the nearest hospital. What type of neighborhood will you be living in? I recommend clients drive through the neighborhood on a weekend as well as at night to see what the feel of the community is.

I hope that you are able to secure your slice of the American Dream. I strongly believe that owning real estate is of the best ways to acquire wealth but I do realize home prices have soared such that they are out of reach for many first- time buyers. If you find yourself in this boat, don’t panic just continue to save money as best you can and remember this market will not soar to the sky forever. You might have to delay purchasing in the short term, but that beats significantly overpaying for a home. When prices come back down to earth be ready to pull the trigger. At the end of the day, this is not a decision you should make on the fly because the impact is too great. You should feel confident in your decision to purchase and be in a position to afford the purchase without setting yourself up for failure.

Good Luck and Happy Home Buying!